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The State of Electricity in South Africa - Part I

This article considers the challenges confronting Eskom and the implications on the production and distribution of electricity

Wednesday 2 September, 2015 - 10:20

“There’s a belief out there that the electricity challenge is a result of the failure of government, of lack of leadership ... The economy of apartheid was racially skewed and structured to take care of the minority, not the majority of the country ... Apartheid forced the majority of people to live far away from economic opportunities, this exclusion must be defeated.” - President Jacob Zuma, 2014

This brief is the first of two addressing the question of the state of electricity in South Africa. It considers the problems of electricity production and distribution currently confronting Eskom.

Black outs have become the norm, and there seems to be no certainty as to when this problem will end. Perhaps what we must contend with is the sporadic electricity supply we have and, the many candle lit dinners we have become accustomed to, even though our economy continues to lose lustre as a result of this current shortage.

How did Eskom, the once revered and efficient public parastatal, get into such dire straits as to make load-shedding part of everyday life in South Africa? Does the notion that apartheid is to blame, as purported by some, hold some water at all?

We may debate the legacy of apartheid within the social, political and economic fabric of post-apartheid South Africa; however, the evidence that Eskom’s misfortunes are due to the period prior to the advent of democracy has not surfaced yet. On the contrary, it seems that the current woes in Eskom have come at the hands of current political incumbents.

Eskom’s failing capacity

The table below depicts the amount of electricity generated by Eskom since 2007, the year which saw the national utility starting to show signs of difficulty.

Table 1

Electricity Generated (production) – Gigawatts-Hours (GWH), 2002-2014

Year

Generated (GWH)

2007

252 938

2011

262 538

2013

256 073

2014

252 578

Source: Stats SA, 2007

Table 2 shows an index of electricity generated from the year 2009 with the base year 2010 set at 100. Although the volume of electricity generated increased by 1.2 percent between 2009 and 2014, the index shows a fluctuating trend in between those years. Electricity generated peaked in 2011, showing an increase of 5.0 percent compared to 2009 levels. Similarly, there was a 3.8 percent reduction between 2011 and 2014.

Eskom produces 95 percent of South Africa’s electricity. The rest is supplied by independent power producers. Some of the electricity produced is used in power stations (7 percent) while some is exported to neighbouring countries (5.4 percent).

Due to a reduction in electricity production, electricity imported went up markedly in 2014 by 18.6 percent compared with 2013. Likewise, electricity exported also went down slightly by 0.7 percent in 2014 compared with the previous year.

Just as production of electricity by Eskom showed a declining trend, so did distribution. The table below shows indications of the amount of electricity distributed between 2010 and 2014 as Eskom struggled to keep up with demand.

Table 3

Electricity Distributed – Gigawatts-hours (GWH), 2010 – 2014

2010

2011

2012

2013

2014

238 272

240 528

234 174

233 105

231 449

Source: Stats SA, 2015

Table 3 shows a 3.8 percent reduction in the amount of electricity distributed by Eskom between 2010 and 2014. The amount of electricity distributed by Eskom did show indications of a slight improvement in 2011. However, since then electricity distribution has been declining trend.
Early warnings

The weakened capacity of Eskom emerged in the late 1990s when warnings were raised about the energy utility’s inability to keep up with the nation’s energy demands.

According to the White Paper of 1998, the country was poised to run out of electricity by 2007, due to poor maintenance as well increasing energy demand. Although the report was signed off by the then Minister of Energy, Panuel Maduna, however, no new investment followed. Eskom’s numerous requests to build new power stations were denied in 1998. Moreover, government served blight to Eskom’s expansion by instructing it to halt the building of new power stations as it was considering privatising the energy utility.

It was not until in 2004 that government started acknowledging that electricity supply was insufficient for the growing economy, prompting the Department of Minerals and Energy to invite proposals on how to increase production by at least 1 000 Megawatts (MW) annually from the year 2007. The private sector was hesitant in responding to the request, raising, among other concerns, Eskom’s intention to retain at least 70 percent of generation and therefore dominance of the market.

Eskom’s challenges continued unabated, eventually reaching their height in 2008 when nationwide power outages were rolled out by the utility as reserves in the grid reached their lowest levels ever. This led to high profile government officials admitting tor erroneously refusing to heed the desperate pleas by Eskom. The then Minister of Public Enterprises, Alec Erwin, was first to acknowledge this mistake in 2007:

“We took the decision to charge Eskom with providing 70 percent of new capacity. As I have indicated, we accept with hindsight that the decision was too late. It is the underlying reason for the conditions with which we are now faced”.

President Thabo Mbeki said in 2008:

“When Eskom said to the government: ‘we think we must invest more in terms of electricity generation’… We said not now, later. We were wrong. Eskom was right. We were wrong.”

President Mbeki’s admission of the failings of his administration are a far cry to the current trends in government in which incumbents refuse to take responsibility for not being able to deliver on infrastructure projects. However, his admission did not help remedy the situation. A barrage emerged of problems that seem intractable.

The financial status of Eskom

In addition to its poor production capacity, Eskom’s balance sheets have not been in good shape, which compounds the utility’s inability to provide the required electricity. The poor state of its finances is the reason that public utility has been downgraded to junk status by sovereign rating agencies such as Standard & Poor.

It is clear that Eskom needs to get its house in order; however, it is unlikely that its state of finances will receive a clean bill of health any time soon. Recently the National Energy Regulator of South Africa (NERSA) threw out Eskom’s application for 25 percent tariff hike, suggesting that the utility might need to come up with ways to generate the required financial resources in order to keep operations going. Government’s move to sell Eskom’s 13.91 percent stake in Vodacom is the latest in a drive to inject equity into the utility.

It is not clear how much Eskom spends and save. Currently, its books are not transparent, which NERSA has cited partly as the reason for not granting the tariff increase. However, Eskom made the case for the need to recover R53 billion to plug holes on its finances as a result of higher operation costs.

While Eskom recorded a profit of R7 billion in 2014, there is no disputing the fact that it is grossly inadequate to bring the utility out of the red. Its capital projects, which include the construction of new power stations, come at a hefty price.

Conclusion

Eskom is in a dilapidated state and it has plunged South Africa deeper into an energy crisis. The energy utility has failed to keep the lights on in spite of the fact that consumption levels have been declining. There is no doubt that for things to go back to normal, Eskom will need a massive capital injection in order to breathe a new lease of life into its operations. Small wonder it has frantically been devising ways to turn its fortunes: from tariff hikes to selling of its stake in commercial enterprises, to seeking funding so that it can fast-track its infrastructural projects.

The next Brief will consider the progress being made in Medupi and what it means for South Africa’s energy crisis.